Is the ACU coming?
The what?! Yes you heard right, the ACU (Asian Currency Unit - From Wikipedia). Well it is not safe to anything just yet but it might actually be a distinct possibility it seems.
'China and Japan, Asia’s two economic giants which are also political rivals, have developed “an unusual consensus” in support of an Asian Currency Unit to reduce their reliance on a weakening dollar, a senior Chinese economist said on Tuesday.
China was originally suspicious of proposals for an ACU because it would be dominated by the yen, Fan Gang [basically him talking throughout the article] said in a speech delivered on his behalf on Tuesday at a conference at the Australian National University in Canberra.
But he said China’s economic and trade growth has swept away many of these concerns. “There is no fear of potential dominance by the Japanese yen,” he said.'
(...)
'The so-called ACU would not be the precursor to a euro-style currency but a new benchmark for the region to denominate exports and price cross-border bonds and other financial instruments.
An ACU-like index was first proposed by Japan to promote regional currency stability after the regional financial crisis in 1997, and it has been more recently promoted by the Asian Development Bank, which is headed by a former Japanese government official.
The issue was also canvassed in a meeting of north and south-east Asian financial ministers earlier this year, who agreed to launch a study of the ACU.
“This is no ivory tower exercise. Both China and Japan are very serious about it,” Mr Fan said.'
Oh and lets do those global imbalances while we are here shall we? Actually Mr. Fan makes some valid points here which all goes back to the idea of a reserve currency and Bretton Woods.
'Mr Fan said he would prefer China continue to use a credible global standard rather than an ACU, which would reflect the value of a hypothetical Asian currency by taking a weighted average of regional currencies.
But the weakening of the US dollar since the 1960s had left Asian countries which rely on the greenback as a reserve currency in an increasingly untenable position.
Mr Fan defended China’s managed exchange rate regime for its currency, the renminbi, and said calls for it to appreciate much more rapidly were misguided.
A stronger renminbi would do little to solve the problems of global imbalances, because “the current problem isn't [renminbi] revaluation but US dollar devaluation,” he said. “This is the major cause of the current imbalance.”
The role of the US dollar as a global currency standard had freed the US and successive administrations from the usual economic constraints of excess liquidity, he argued.
“It seems that no matter how large the US fiscal deficits are, no matter how loose the monetary policies and how much the excessive liquidity provided are, the US is not likely to run into financial crisis like any one else in the world would do,” he said.'
When it comes to global macroeconomic global imbalances I am not going to take side in this devaluation war between USA and China. In the end the US is slowing which will shrink the CA deficit but if the structural Bretton Woods 2 still prevails then I guess the global imbalances will linger with huge savings in China and Petro exporters as a result. On the ACU I am have to say no ... at least for the time being. I do not think it is a good idea but this is an intuitive argument more than I can list five reasons why not to do it. What about as an index then for weighing exports then? Here I also have my doubts as such an index probably would hurt exports in other Asian economies because its denomination would be too high.